WITH an estimated 175 billion barrels of reserves in oil sands, Canada is destined to play a crucially significant role in the global energy dynamics of tomorrow. Yet, before assuming the mantle, the economic managers in Ottawa have a real task in hand – hundreds of billions of dollars need to be channeled into the sector. It is estimated that Canada needs more than $600 billion to develop its oil sands over the next decade. And most agree, foreign direct investment is necessary if the country hopes to fulfill its ambition of being a major player in the global energy circuit. From where, this money is going to come from? To some, the otherwise business-friendly conservative government in Ottawa is confused on the issue. On one hand it rightly wants to encourage and promote foreign investments in the sector, yet, at the same time, it is endeavoring to control the entry points tightly too. Indeed one can't be correct on both counts! Late in October, the Harper government opted to delay its approval of the $5.2 billion deal on the purchase of Progress Energy Resources Corp. by the Malaysian state-owned oil company Petronas. Until the announcement, it was almost a certain deal. The ruling stunned many, casting doubt on Prime Minister Harper's repeated assertions that the country has an open door to foreign investment. Many felt politics got involved, as always, in the final moments – blocking the deal. Reports say Ottawa wanted to approve the Petronas-Progress deal but was afraid that would tie the government's hands when reviewing the much more controversial $15.1 billion bid by China's CNOOC Ltd for Nexen Inc. Officials were wary of setting a policy on investment by foreign state-owned enterprises that would make things difficult, if Canada later decided to take a tougher line on CNOOC-Nexen. China had already invested more than C$10 billion in the Albertan oil sands, the world's third largest proven reserve of crude, by buying small companies or taking minority interests. But Nexen has upped the ante. Canada initially saw no reason to reject the Malaysian oil giant: Petronas was already partnering with Progress to develop a shale-gas field in British Columbia and an LNG terminal on the Pacific coast. The projects were also in sync with Canada's wish to diversify energy exports away from the United States, and officials with Industry Canada sent the Petronas-Progress file with a recommendation to approve. Canada realized it had to work out guidelines on foreign investments before answering Petronas, so China could not complain about double standards. Ever since Ottawa nixed the takeover of Potash Corp. by an Australian company in 2010, it has been promising to clarify the rules on whether such a deal provides a “net benefit” to Canada. The new wrinkle is that companies on the hunt for our oil and other resources aren't just free-market players; increasingly they are state-owned companies. That, apparently, is why Ottawa vetoed a bid by a Malaysian state-owned company, Petronas, for Calgary's Progress Energy Resources Corp. Ottawa has set itself a deadline of Nov. 11 to make a decision on CNOOC. In leaks to selected media outlets the government has indicated that it intends to make a distinction between regular, privately-owned foreign companies and state-owned enterprises like Petronas and CNOOC. The rejection of the Petronas deal has worrying implications for CNOOC's Nexen bid and the future of foreign investment in Canada's resource sector. “It can cause some of the financing for other projects, which are badly needed — there are a lot of pipelines that need to be built, a lot of projects that need cash — to slow as well,” underlined Charles St-Arnaud, Canada economist for Nomura Securities International Inc. The uncertainty over foreign investment rules comes at an inopportune time. Stéfane Marion, chief economist and strategist at National Bank Financial, said that although oil and gas stocks have performed well in the last six months, a lack of clarity over foreign investment in Canada has the potential to reverse the rally. “The reality is, if you want to avoid a discount on the Canadian energy sector, you want to stop being a prisoner to only North American investment for Canadian energy,” he said. “You need to develop Canada's energy sector with the help of foreign players.” The fear now is that the government's rejection of the Petronas deal was simply to prepare everyone for a rejection of the larger CNOOC bid for Nexen. Both Petronas and CNOOC are state-owned enterprises, which would make the federal government look consistent on the issue. And in the meantime, interestingly, TransCanada announced a partnership with Phoenix Energy Holdings Ltd. to build a $3-billion pipeline connecting an emerging oil sands region to the Edmonton area. Phoenix Energy Holdings Ltd., the Canadian subsidiary of PetroChina Co. Ltd., is partnering with TransCanada Corp. to build the Grand Rapids Pipeline System, 500 kilometers from northwest of Fort McMurray to Fort Saskatchewan, near Edmonton. It is expected to carry oil from the MacKay River and Dover projects that PetroChina has largely secured from Athabasca Oil Corp. The project — split 50-50 with Phoenix, a unit of China National Petroleum Corp. — would ship 900,000 barrels per day of crude oil south and 330,000 barrels per day of bitumen-thinning diluent north to the sites. The pipeline is the latest move by Chinese companies into the Canadian oil sector, and shows the maturing work of those firms in Canada, which are moving past acquisitions into building oil production. Ottawa's new foreign ownership guidelines are coming into play just as a large number of oil sands assets are poised to change hands. In a new report, Calgary energy investment bank Peters & Co. said oil sands assets worth $17-billion are up for sale -formally and informally — about the same value as oil sands assets sold over the entire last decade. And interestingly, the big sellers appear to be US companies looking to get out, while the buyers seem to be national oil companies (NOCs) — such as those from China — looking to get in. “The current high level of oil sands assets potentially for sale results from the cost intensive nature of developing these assets, combined with the lower netbacks compared to other crude oil plays in North America,” the investment bank said in its report. Among the asset sellers, Marathon Oil Corp. is in negotiations to sell a portion of its 20 percent stake in the Athabasca Oil Sands Project. Murphy Oil Corp. wants out of the Syncrude project. ConocoPhillips has put various in situ properties on the block. The report says that based on current ownership interests, NOCs will own less than 10 percent of production from the oil sands by the end of the decade, while oil majors (including Exxon MobilCorp. and Royal Dutch Shell PLC) and North American independents (such as Suncor Energy Inc. and Devon Energy Corp.) will continue to dominate. It underlines that foreign investors will continue to be oil sands buyers over the next few years. There isn't enough capital in Canada to fund growth plans. Ultimately Ottawa will have to give in. Mixing politics with energy isn't always helpful!
